The on-demand economy doesn’t have to imitate Uber to win

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Uber’s momentum on the west coast was recently challenged by the the California Labor Commission, which ruled in June that Uber drivers should be categorized as employees, not independent contractors. The ruling is non-binding and will likely shake out over several years and several appeals. However, the potential implications span far beyond just Uber.

With an estimated 17 million Americans classified as contractors today and projections that 40% of the workforce will be classified as freelancers by 2020, this issue is about the fastest growing sector of job growth. Many of these independent contractor jobs are coming from new service and tech companies like mine in the “on demand” or “sharing” economy. Startups like Uber, Lyft, Handy, Instacart (*which announced on June 22 that it was evaluating converting some 1099 to W-2 contracts), Postmates, and many more assert that they afford independent contractors access to flexible work as digital “third party platforms”—the technological middlemen—that connect workers to tasks.

While I’m not going to weigh in on the legal and political complexities of the Uber ruling, the debate about how employees should be categorized as technology introduces new nuances into the economy, is well worth discussing. As an entrepreneur that recently raised funding to run after a service-based idea, I want to explain how we assessed this situation and how we arrived at the decision to have W-2 employees at Hello Alfred.

In September 2014, Jessica Beck and I launched our business, following graduate work at Harvard Business School. Our idea was simple: we wanted to give people back their time with the help of empathetic people and the smart use of data. With the proliferation of on-demand companies we saw an opening to become a service layer and a single point of contact to manage the available services and become a part of your home routine. We are part tech platform, and part service logistics company, integrating services in the background and then making the experience frictionless as a dedicated ‘Alfred Client Manager’ visits our members’ home each week to coordinate everything past your door. People have referred to us as the Uber for your home. We like to say Alfred is your personal butler.

It would have been logical for us to classify our growing Alfred field team as contractors. Service startups favor the use of 1099 contracts as they reduce cost and risk. The classification provides maximum flexibility to hire, fire, and change wages (independent contractors are not subject to minimum wage laws or other laws that protect employees). Companies are at arm’s length and have limited responsibility for tax withholding, benefits, insurance, and training. But the other side of the coin is that when workers are classified as contractors, companies are also legally precluded from telling them when and how to do their jobs. Central to the Uber debate is that the on-demand sector has stepped over this line, mandating rules of how work is done, but denying benefits and protections that would come with employee status.

Our decision to provide W-2 jobs ran contrary to conventional tech wisdom and was met with skepticism by the investment community. Would-be investors balked at the added cost and complication of hiring W-2 labor. Several investors we pitched said,“That doesn’t make sense. That’s not a scalable business model.”

It does of course ‘cost more’ to hire W-2 employees over contractors—by our calculation a 20-30% increase in overall cost structure. But, for certain businesses, there is a cost associated with not hiring W-2s. The place to look for this cost is the churn rate. It happens both on the supply side, when contractors come to your platform, but leave quickly, increasing recruiting costs and limiting availability of your product; and on the demand side, when customers try your product, but leave you due to inconsistent quality, often driven by lack of training.

W-2 employment plays an important role in the development of the US workforce. It is typically through employment that our workforce advances their skills (training) and receives access to systems that enable long term life planning (healthcare, benefits, life insurance, financial planning, 401Ks). There is a strong correlation between a country’s GDP and its investment in human capital. Which begs the question: what happens when people keep working, but companies stop investing?

From a first principles perspective, Jessica and I were concerned about the quality of jobs we were creating. While technology can increase access to new goods and services, it also risks increasing the distance between groups of people being served and serving. Our business is based on people serving other people; hospitality has always been about relationships. Technology platforms by their very nature drive things to be transactional. Employment gets broken down into commodity actions. “Helper X deliver from point A to B”. The value of human labor is driven down, and workers become easily interchangeable. Platforms turn people into transactions rather than building meaningful relationships that could foster their career and skill development.

There should not be a disconnect between the success of a company and the success of its workers. We believe treating our employees as our primary customer is how we can best satisfy our end users. It can become difficult to achieve this with the 1099 classification, because it inherently distances the worker from the company. There is no onus to provide meaningful work, training, or career advancement.

In the end, the debate is not really about 1099 versus W-2. These classifications will evolve as the law catches up to the modern workplace. But until then, companies need to have clear thinking on the best way to structure the relationship with their workforce, based on what they do. Companies should create the right relationship with their workers, not just the cheaper one.

Companies that choose to use independent contractors can help their workforce achieve balance in other ways. Lyft, by way of example, has created a partnership with Freelancers Union, making its drivers eligible for the advocacy group’s health plan and other benefit programs.

Individual workers must also learn about the different options available to them. Everyone has the opportunity to craft their own career and should protect themselves from becoming a mere transaction. There are creative ways to do this: write and talk about your experiences, and describe how you solved the problem. Educate and organize others to do the same.

Finally, the tech world has to change the dialogue. As we attempt to connect the offline and online worlds, computers cannot do everything; people must step in to fill the gaps. These people often work in the background to deliver, clean, drive, or do things for us. We focus too much on “how many bookings, how many rides, how many deliveries, how many stars?” While these metrics matter, there is no mention of the humans that power these services. Tech enabled service companies act like they are ashamed of the fact that they are ‘people powered’. The investors we pitched reinforced the popular belief that “Servers scale, people don’t,” so new companies tend to focus on the scale advantages of building a marketplace, leaving the contractors to fend for themselves.

Startups are disruptive—because they deploy limited resources and break the rules of how things are currently done, to try to create something better. It remains an open question whether the on-demand industry is breaking classification rules, but either way, we have the opportunity to define new ones.

For us, breaking the rules means making people the center of our tech business. It means taking on responsibility to provide good jobs. The relationship companies have with workers is not just about cost, it is about principles. It turns out those principles are good for business anyway. We are not the bystanding middlemen anymore—we are leading the growth engine—so let’s do it right.

*Update: Several source links, and news of Instacart’s announcement exploring converting 1099 workers to W-2s have been added to this post.